Saving the Euro Is Pretty Easy

Saving the Euro Is Pretty Easy

Saving the Euro Is Pretty Easy

Kevin Drum says that "the collapse of the eurozone—if it happens—will probably become a textbook example of the difficulty of collective action, right along with climate change and the League of Nations." Collective action is difficult, but I don't really think that's the issue here. It's of course possible to spin out an elaborate euro-saving strategy that's full of multilateral agreements and credible commitments and reforms and so forth but and then collection action does look like the problem. But the difficulty of that kind of collection action is simply why no large economic units operate that way. Nevertheless, large economic units do manage to exist.

But if you look at a big place like the United States or China what you see are huge place-to-place divergences in economic vitality paired with large open-ended transfer programs. Even in smaller economies, the old West Germany has been subsidizing the old East Germany for a long time and will continue to do so for a long time. In Italy, the north helps carry the south. In the U.K., the south helps carry the north. Sometimes these things are formalized as place-to-place transfers (Canada, I believe, has large provincial equalization payments) and sometimes it's person-to-person transfers that happen to have the net impact of letting Massachusetts subsidize Mississippi. The European Union does a little of this, but the scale is tiny compared to the continent as a whole. As we saw yesterday, most individual European countries have a lot of within-country transfer payments from rich people to poor people but Europe as a whole is marked by a high level of inequality and near-total absence of transfers. If in the United States every bailout of the poor parts of the country by the rich parts was marked by protracted negotiations and stern demands that West Virginia "reform" its underperforming economy we'd be in perpetual crisis. And of course you might ask yourself why the federal government does so much for low-income residents of the United States and so little for the poorer low-income residents of low-income Mexico. And of course the reason is nationalism. Nationalism inspires us to help our fellow American when we can and leaves us relatively cold about the plight of people living in Peru.

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The euro was meant to be a step in a project of "ever closer union" in which Europe's nationalisms would be overcome and replaced by a pan-European identity. That's because the only way to make it workable would be for European voters and European politicians to act in a spirit of continental solidarity and think on a continental scale. It was, from the beginning, a fairly utopian project. But now that the crisis is upon us, it looks like nobody wants to try to play the role of visionary leader who brings the utopia to fruition.